After decades of cooperation between Saudi Arabia and Kuwait on hydrocarbons production in the Divided Zone, which is shared by the two countries, the area’s output is expected to fall to zero over coming weeks amid an ongoing dispute between Kuwaiti authorities and Saudi/US Saudi Arabian Chevron, the company that operates the shared fields on behalf of Saudi Arabia.

After months of struggling with uncooperative Kuwaiti authorities, which have denied visas for the company’s staff and blocked shipments of equipment and materials, Saudi Arabian Chevron is preparing to wind down its operations at Wafra, the Divided Zone’s last remaining operational oil field.

Saudi Arabian Chevron has informed Kuwait of its plans to start withdrawing from the field on 9 May, according to sources.

Uncertain future

The threat of Chevron’s withdrawal means the future of the $5bn Wafra development project, for which engineering, procurement and construction (EPC) deals were to be awarded before the end of the year, now looks very uncertain.

The development scheme was planned to reverse declines at the shared field, boosting production by 80,000 barrels a day (b/d). Its cancellation turns up the heat for Kuwait’s government, which was already struggling to raise oil production from 2.8 million b/d to hit its 2020 production target of 4 million b/d.

Additionally, the shutdown at Wafra has raised worrying questions about the way the Divided Zone is managed, the stability of the relationship between Saudi Arabia and Kuwait, and increased concerns that other planned schemes in the area could also be derailed.

Bad record

The Wafra field development scheme is the third major project to be derailed in the Divided Zone in the past two years.

In August 2013, the Dorra Gas Field Development project, which had an estimated budget of more than $2bn, was shelved. Although no satisfactory official explanation for the project delays was given, at the time sources told MEED it was abandoned after Saudi Arabia and Kuwait failed to agree on the best way to extract the gas.

The initial plan was to transfer the gas to the kingdom to be processed, with Kuwait’s share being sent from the Saudi gas plant via a pipeline. Kuwait disagreed with this plan, arguing instead that it should be able to transfer its share directly to a domestic gas plant.

Gas crunch

This disagreement eventually caused the scheme to be shelved indefinitely, despite its potential produce 600 million cubic feet a day, which would have helped alleviate a supply crunch in both countries, with both struggling to meet growing domestic demand for natural gas.

The second project to be derailed was the operational 310,000-b/d Al-Khafji oil field, which was unexpectedly taken offline on 16 October 2014 on the orders of Saudi Arabia.

Officially, the kingdom said this was due to the field’s failure to comply with environmental standards, but this fails to explain the sudden and unexpected nature of the shutdown and insiders have claimed Riyadh’s intervention was politically motivated.

Officials have yet to reveal a timeframe for the Al-Khafji offshore fields to come back online.

Project failures

The failure of both Saudi Arabia and Kuwait to give adequate explanations for the project shutdowns and the denial of work visas to Chevron staff has prompted much speculation as to the reasons why the projects have failed.

Speaking to MEED, several energy industry sources said they thought the Kuwaiti restrictions placed on Saudi Arabian Chevron were a reaction to the closure of the Al-Khafji offshore fields in October – and form part of a long-running dispute over land use in the Divided Zone.

The quarrel dates back to 2007, when Kuwait outlined plans to build its $14bn Al-Zour refinery on land that included a site near the town of Al-Zour, which was under lease by Saudi Arabian Chevron.

The dispute flared again in 2009, when Saudi Arabia renewed the lease for Chevron’s site near Al-Zour and Kuwaiti sources complained to the media that there had not been proper consultation with the Kuwaiti government over the 30-year extension.

Long-running issues

“There are long-running issues between the two countries when it comes to trust and the equal division of production from joint operations,” says one energy industry source based in the Divided Zone.

“This was certainly at the heart of the failure of the Dorra gas project and it looks like it has played a part in the demise of the Wafra scheme as well.”

The Al-Zour scheme remains stuck at the tender stage after bids came in above budget, and at least one package is expected to be retendered over coming months.

Close cooperation

The collapse of so many high-profile joint operations projects within such a short amount of time has surprised many analysts, especially as it comes amid a period that has seen close cooperation between Kuwait and Saudi Arabia in other sectors.

In November 2013 Kuwait was a signatory to a GCC security pact that was signed in Riyadh, committing to closer cooperation within the bloc on defence issues. In March 2015, Kuwait committed 15 warplanes to the Saudi-led military intervention in Yemen.

“The failure to agree on solutions to the issues surrounding oil and gas projects in the Divided Zone is quite surprising given the Saudi-led push to homogenise and close ranks in the GCC,” says David Roberts, a lecturer on Gulf relations at King’s College London. “Kuwait is on the same side as Saudi Arabia, broadly speaking, and in other areas they’ve toed the line when necessary. So this suggests the differences are potentially quite problematic.”

High costs

Other factors analysts cite as contributing to the collapse of the Wafra project are the high costs involved and the recent decline in global oil prices. The crude in the Wafra field is especially viscous and the planned field development project involved expensive enhanced oil recovery techniques to boost production. These included the construction of desalination facilities and gas-fuelled plants to produce super-heated steam.

The expense of getting the oil out of the ground at Wafra may mean both Saudi Arabia and Kuwait are likely to welcome the opportunity to drop the project and divert the funds they were planning to spend on the scheme to other, more efficient field development projects.

“The Wafra field development project was conceived at a time when there were expectations of ever-accelerating demand for oil in Asia,” says one Saudi-based analyst. “Due to the expenses involved, it is debatable whether the project should have been given the green light even then. Now that oil prices are much lower, it is totally unviable.

“The costs are too high and the oil is very heavy. Losing money on this doesn’t make sense for any of the stakeholders.”

Border problem

The nature of the treaties that govern the Divided Zone may have contributed to the recent spate of project failures in the region, which have taken place amid a period of otherwise good relations and close cooperation between Saudi Arabia and Kuwait.

The neutral zone was established as a temporary resolution to the lack of a defined border between Kuwait and Saudi Arabia in the 1920s and lasted until the mid-60s, when the two countries agreed to divide it in sovereign terms.

A new land border, dividing the Saudi and Kuwaiti halves of the territory, was added in 1969 and a maritime border was agreed on in 2000.

While the agreements split the Divided Zone into two sovereign areas, it remains a single economic zone, with Saudi Arabia and Kuwait agreeing to maintain the principle that the proceeds from all upstream developments in the region would be split between the two countries.

“The treaties are clear enough and officially there shouldn’t be problems from unresolved boundary issues, but having separate sovereign status with a joint economic status overlaid is always going to be subject to difficulties,” says Richard Schofield, founder of the journal Geopolitics and International Boundaries, and a senior lecturer at King’s College London.

“Due to the unusual nature of the way the Divided Zone is administered, there is increased potential for disputes over operations compared with projects that exist within a normal sovereign state.”

Still divided

Whatever the reasons behind the series of project failures in the Divided Zone and the collapse in production over recent years, the trend and its implications remain worrying.

 The project failures in the region have marked a significant step backwards in Kuwait’s efforts to boost domestic hydrocarbons production, with UK oil and gas research company Energy Aspects predicting that total Kuwaiti production will decline over coming weeks as it lacks spare capacity to compensate for the lost barrels.

The failure of Saudi Arabia and Kuwait to reach an amicable resolution over issues such as the development of the Dorra field and Kuwait’s dealings with Saudi Arabian Chevron also highlight diplomatic failings that some believe could degenerate into more serious problems in the future if they are not seriously addressed.

Stakeholders worried

The collapse of so many Divided Zone ventures is especially worrying for those who have a stake in planned or ongoing projects in the region, including Kuwait’s Al-Zour New Refinery Project, which is due to see EPC contracts awarded this year.

“The ongoing tensions over activities in the Divided Zone are the biggest political risk to the Al-Zour refinery project,” says one senior EPC source connected to the New Refinery Project.

“Construction isn’t due to start for quite some time, which means there is plenty of time to resolve any issues, but the problems in the Divided Zone remain a significant source of risk.”